Thursday, May 16, 2013

HS2 creates no jobs at all.

The overgrow school children who play the part of politicians are often mesmerised by anything resembling “toys for boys”: whether its advanced technology trains, boats or planes. And of course a common reason they advance, with a view to being able to play with a new toy, is the idea that making the toy “creates jobs”.

Certainly the job creation excuse has been pushed for all it’s worth in the case of the HS2 rail project being proposed in the UK.

A near identical, and equally daft phenomenon occurs in the US, where Republican politicians regularly claim that expanding the deficit so as to spend more on the military will create jobs, whereas expanding the deficit so as to spend more items not approved of by the political right apparently has no job creation effects at all.

If public spending on trains creates jobs, then presumably spending public money on education, health and the dozens of other items on which government spends money should also “create jobs”.

In fact, given that public spending has risen from about zero percent of GDP to near fifty percent over the last 150 years,  unemployment should have vanished long ago.

But amazingly, unemployment is about the same as it was 100 or 150 years ago.

Now if you’re an economically illiterate politician who gets mesmerised by toys for boys, you’ll be baffled.

In contrast, and for those of us who understand economics, the reason why expanding public spending fails to have any effect on unemployment is simple enough, and is as follows.

Anyone with a pre-university qualification in economics can tell you how to expand demand and raise employment. And it makes very little difference what the extra money is spent on: it can be public sector items or private sector items.

But in either case, the big obstacle is inflation. I.e. raise demand far enough, and inflation kicks in.

Now assuming unemployment is as low as it can go without causing excess inflation (which is where it should be), the NET INCREASE in spending so as to get HS2 going is just not allowable. That is, any such spending will have to come out of taxes, which in turn will reduce spending on other items.

The net effect on “jobs” will be zero.

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